Welcome to U.S.-China Relations, this is Jeremy Ford your host for today’s segment, along with Michael Feltz and Catherine Hennessy. This segment is titled “China, The World’s Biggest Energy Consumer, Joint-Venture with Overseas Partners.” Thank you for visiting us at www.sohnetwork.com
State-owned Commercial Aircraft Corporation of China (also referred to as COMAC) will need more than 2,000 new single-aisle passenger jets between now and 2028. Since 2008, China has been investing heavily to promote the 150-to-200-seat passenger jet, referred to as “the C919 project.” The plane is scheduled to fly by 2014 and enter service with Chinese airlines in 2016.
General Electric Company and joint-venture partner Aviation Industries of China will supply avionics systems for the C919 jetliner. The systems are the aircraft’s central information system, hosting cockpit displays, and maintenance and utility functions. Manufacturer Eaton Corporation signed a joint-venture agreement with COMAC to provide fuel and hydraulic systems for the program. Eaton Corporation valued its agreement at $1.8 billion. COMAC owns 51% of the venture.
Honeywell International Incorporated was selected to provide wheels and brakes for the plane, and Rockwell Collins Incorporated was hired to provide communications and navigation systems. China has been an extremely reliable customer for Airbus and Boeing through the current economic cycle, commented by Seattle-based consulting firm Leeham Co. China aims to take a third of the market for single-aisle planes, now divided between Boing Co. and the Airbus unit of the European Aeronautic Defense & Space Co. The plane’s potential success could have an impact on trade balances between China and the U.S., as well as the European Union. Even if the plane sells only in China, it will shrink one of the most lucrative markets for industry leaders.
China is also the biggest buyer of many kinds of raw materials from places such as Latin America, Australia, and Africa. The country’s surging appetite has transformed global energy markets and propped up prices of oil and coal in recent years. China’s consumed oil equivalent last year was about 4% more than the U.S., although 10 years ago it was only half that of the U.S.. In viewing double-digit growth rates and because the global recession hit the U.S. more severely, which slowed American industrial activity and energy use, China is expected to surpass the U.S. in about five years. The oil-equivalent metric represents all forms of energy consumed, including crude oil, nuclear power, coal, natural gas, and hydropower. The thirst for energy such as petroleum for the world’s largest automobile market could drive fear and oil prices up again and drive competition for supplies globally. Michael Feltz will take you to a step by step walk through to analyze the consequences of Beijing’s global push.
China overtaking the U.S. as the biggest power consumer was fueled not by consumer demand, as in the U.S., but from energy- intense heavy industry and infrastructure building. China’s growing energy demands will present new challenges to U.S. foreign policy as well as to international efforts to reduce emissions of greenhouse gases linked to climate change since China gets most of its electricity from coal. Coal is the most polluting of the fossil fuels and is propelling China to become the world’s largest emitter of carbon-dioxide emissions and other green house gases. However, Beijing has refused to agree to cap its overall growth in its consumption of fossil fuels, and has refused to reduce its emissions of carbon dioxide and other greenhouse gases. China instead set a target to reduce emission intensity and agreed to make its economy more energy efficient – boosting its competitiveness – but not to consume less energy overall. This is China’s push to adopt and expand more energy efficient technologies – from solar to advanced batteries for electric vehicles. China is now the largest exporter of solar panels and is fast expanding its capacity to produce wind turbines and advanced batteries for electric cars. Therefore, the U.S. must move swiftly if it wants to keep abreast of its primary Asian competitor. Since last year, China has contracted with Iraq and Iran for oil and gas. Saudi Arabia, the world’s biggest crude exporter, now ships more to China than to the U.S. Moreover, corporate giant General Electric has increasingly looked to China as well due to the decreased energy intensity of the U.S. economy. China requires total energy investments of some $4 trillion over the next 20 years to keep feeding its economy and to avoid power blackouts and fuel shortages. This is Michale Feltz for SOH Radio Network.
Another method to balance the trade imbalance is to quicken appreciation on Chinese currency, the Yuan. China holds the world’s largest foreign-exchange reserves, which reached $2.45 trillion at the end of June. China’s central bank loosened the currency’s peg to the U.S. dollar on June 19, but the Yuan has risen less than 1% against the dollar since then. At current rates of appreciation, the yuan would rise more than 8% over the next year – though there is no guarantee. The Chinese plan a steady increase because China is intent on shifting to a more-flexible currency. Catherine Hennessy will bring you a closer look on why China is unwilling to deliver its promises to ease global economy woes by speeding up appreciation on the yuan although the yuan is undervalued by 40%.
Ms. Hu Xiaolian, a deputy governor of the People’s Bank of China pointed out that a fixed exchange rate would be dangerous to the nation’s economy and that rigid exchange rates had contributed to financial crises in the past, including in Mexico in 1994, Argentina in 2001, and several Asian countries in 1997. She said, quote “Thus, it is necessary for large counties to have a flexible exchange rate policy” end quote. She is also concerned that letting the exchange rate rise could hurt Chinese exporters by making their goods more expensive in dollar terms. China’s top leaders treasure stability, but want to strengthen domestic consumption and reduce China’s reliance on exports.
It is understandable that China is driving to catch up with wealthy nations on technology, infrastructure, and education. Japan, South Korea, Taiwan and Singapore went through similar periods. The continued robust growth rates of the past can’t be sustained forever for many reasons: 1. China’s one-child policy implemented since 1984 impacts global economy. 2. Annual Increases of labor cost and government-mended benefits in China push business to the low-cost countries like Vietnam and Pakistan.
Shortly after Beijing announced its move, President Barack Obama suggested that the U.S. would judge China’s progress over the course of a year or maybe the months ahead. The small appreciation thus far has the Obama administration and Congress looking for levers to keep pressure on China. Treasury Secretary Timothy Geithner has said quote “What matters is how far and how fast the renminbi appreciates.” End quote. This is Catherine Hennessy for SOH Radio Network.
What should China’s exchange-rate policy be? Let’s see what we have learned from Japan, as America’s foremost industrial competitor back then. After the inflationary chaos following World War II in 1949, the Japanese government got rid of multiple exchange rates and then fixed the rate at 360 yen per dollar. With this dollar anchor, the postwar Japanese labor productivity in manufacturing growth and earning wages growth were more than twice as high as in the U.S which allowed trade balance and international competitiveness. But, in 1971, President Richard Nixon forced Japan to appreciate against the dollar by 17%. Then at the same time the dollar depreciation caused huge hot money flows out of the U.S. Foreign central banks intervened heavily by buying dollars to prevent their currencies from appreciating more than what was agreed to with Nixon. The result was a world-wide loss of monetary control, great inflation, large business cycle fluctuations, and slow economic growth for 10 years.
In 1995, the Japanese yen rose 78% to a high of 80 per dollar from 360 per dollar. Hot money inflows first contributed to land- market and stock-market bubbles in Japan. The overvalued Japanese yen threw the economy into a deflationary slump. The money wage growth is less than in the U.S. and still falling now.
What is the lesson for China? Exchange rate appreciation and money wage growth are substitutes in the long term. But an erratically appreciating exchange rate with the associated hot money flows does long-term damage to the economy. “It is best to keep the exchange rate safely fixed near 6.83 Chinese yuan to the dollar as it had been for two years”, said Mr. McKinnon, a professor at Stanford University and a senior fellow at the Stanford Institution for Economic Policy Research.
In Baltimore, this is Jeremy Ford for SOH Radio Network. Thank you for listening and tuning in to http://www.sohnetwork.com. Until next time… signing off.